Capital Gains and Games

Health Care, Not Reconciliation, Is The Issue

Stan Collender — Tue, 09 Mar 2010 10:10:18 +0000

My column from this morning's Roll Call explains why reconciliation, a subpart of the congressional budget process, and a sub-subpart of the legislative process, isn't what we should be arguing about.

Can We Please Stop Talking About Reconciliation?

My fellow Roll Call columnist Norman Ornstein was one of the authors of a truly excellent chart on reconciliation that appeared in the New York Times on Sunday.

Norm, and his two co-authors, Tom Mann and Raffaela Wakeman, show in an almost full-page display that reconciliation has been used repeatedly since 1981 and is anything but the, in their words, “power grab” that some are trying to get us to believe it will be if it is used for legislation related to health care reform.

They also show that reconciliation has been used when Democrats and Republicans were in the majority; to increase and decrease the deficit; to increase and decrease spending and revenues; and to create, expand and decrease programs.

No matter how much you might prefer it to be otherwise, this is not partisan opinion, beliefs or analysis. They are indisputable facts that are neither new nor newly discovered.

So let me say this as directly as possible: Enough about reconciliation. It absolutely doesn’t deserve the attention it’s receiving.

Why is anyone talking so much about a subpart of the Congressional budget process (and a sub-subpart when you add in the Byrd Rule) when the issue that really needs to be debated in depth is health care reform?

I am a budget process wonk. I have spent much of the past three decades speaking about and analyzing the ins and outs of the Congressional Budget Act (which created reconciliation) and its successor budget laws. The more people talk about reconciliation and want information on it, the more likely they are to quote me in stories and interview me on television and radio. In other words, the fact that reconciliation is an issue is good for my business.

When someone like me, who has a personal interest in reconciliation being a big controversy, says it’s a side issue that not only doesn’t merit the attention it’s getting but shouldn’t be an issue at all, you have to understand both how painful it is to say and how seriously the point should be taken.

I had this same basic argument a year or so ago with someone who insisted that the United States should have a capital budget. He was willing to fight to the death to change the way the U.S. treated capital expenditures. To sell his point he prepared white papers, talked one on one with countless people in the House and Senate, participated in seminars and persuaded think tanks to include it as a high priority on their agendas.

I told him at the time that the real issue wasn’t the budget treatment of federal capital purchases; it was that the U.S. was underinvesting in infrastructure. But instead of spending his time talking about the benefits of the change that he wanted, for example, on what it would mean if roads could be driven more quickly and safely so that people would get home from work earlier and spend more time with their families, he focused on accrual accounting for the federal government.

Even I, a budget process aficionado who served on a presidential commission on capital budgeting, found that boring and largely beside the point. And, not surprisingly, the issue died.

The same thing is happening now with reconciliation and health care.

There are three reasons why the debate should not be whether this is an appropriate way to adopt legislation.

First, as Norm and his collaborators showed quite definitively Sunday and what we actually knew long before the chart was published, that issue was settled a long time ago.

Second, the most important question is not about the process; it’s about the changes in health care that would be put in place and, like the safer and faster ride home that might happen with better roads and rail, what it would mean for the way we live.

Third, debating the propriety of using reconciliation is a great way to turn off the interest in health care reform outside the Beltway. For most people, “reconciliation” is something you do when you get your monthly checking account statement or what you try to do when you go to a marriage counselor. Outside that it has no meaning.

Those for and against a health care bill may have made a huge mistake in focusing so much of their energies on reconciliation. Not only is it ultimate inside legislative procedure roughly akin to trying to make an issue about Section 302b allocations (Trust me, if you don’t know what these are, you don’t need to worry about them), it effectively means that a good part of the outside interest in the issue will end if the procedure is used, a bill is enacted and the world doesn’t come to an end.

Meanwhile, those who support changes in health care have been engaging on a highly technical procedural issue and, therefore, giving it unnecessary credence. They have also been missing an outstanding opportunity to talk about what the changes will mean to the average voter.

It’s hard to imagine that the average voter will support health care reform because reconciliation was or wasn’t used to put it in place.

Krugman and "Fiscal Scare Tactics"

Edmund L. Andrews — Tue, 09 Mar 2010 02:43:36 +0000

I don’t like to start fights with Nobel prizewinners in economics, especially with one who is usually right, but I have a bone to pick with Paul Krugman on the topic of “fiscal scare tactics.”

For months now, Krugman has argued that Republicans and their lapdog followers in the press have been hyping the dangers posed by soaring federal deficits and debt.

“There’s no reason to panic about budget prospects for the next few years, or even for the next decade,” he wrote in his Times column on February 4. Given the magnitude of this recession, Krugman argues, we absolutely should be running huge deficits in order to prevent an even bigger cataclysm.

Last Friday, Krugman followed up with a post on his blog entitled “Debt is a political issue.” There he explained that the Federal debt, now approaching 60 percent of GDP, wouldn’t pose a huge burden even it jumped to 100 percent of GDP. After inflation, the Treasury’s real interest rate is only about 1.5 percent.

If you do the arithmetic of debt service, that really does seem to suggest that debt isn’t a problem….All the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable?

Now, I agree with Krugman’s broader arguments. No serious economist thinks it would be a good idea to slash spending and deficits yet. At best, that would choke off the feeble recovery. At worst, we would plunge back into a deep recession.

I also agree that Republicans, most of them latter-day converts to fiscal piety, are hypocritically whipping up hysteria to advance two dubious goals: 1) discredit President Obama, even though he inherited today’s mess from Bush; 2) attack Social Security, Medicare and Obama’s health care reform as threats to freedom-loving Americans.

But Krugman doesn’t stop there. Perhaps because he’s convinced this is a political battle, he resorts to gimmicky arguments to make a simplistic case that there really isn’t much of a deficit problem at all.

As a result, I think he undermines his credibility by sounding like a propagandist rather than the truth-teller he usually is.

Full disclosure: Krugman attacked an article that I wrote on the “debt bomb’’ in the New York Times back in November. He called it “alarmist’’ to write about the projected surge in interest expense to $700 billion a year by 2019.

But I’m writing today about two more recent pieces. On February 4, he explained why there was “no reason” to panic about the budget for the next few years “or even for the next decade.”

His evidence? The White House projection of $700 billion in annual interest expenses, 10 years from now, would equal only 3.5 percent of G.D.P. “How scary is that?” Krugman wrote. “It’s about the same as net interest costs under the first President Bush.”

Well, no, it’s not even close to the same. Under Bush, that debt burden occurred when the US was just crawling out from the back-to-back recessions of 1990 and 1991. As Krugman would say, that’s exactly when you would want big deficits and, if necessary, high interest payments.

By contrast, the interest-expense projections we’re talking about here -- which come from the White House and CBO -- are for 2020 and assume that we will have enjoyed TEN YEARS of steady economic expansion. That’s exactly when you’re not supposed to have high deficits.

On Friday, Krugman made another dubious comparison. This time, he threw up a chart showing that the United Kingdom’s public debt shot up to 250 percent of GDP during World War II and then plunged back to normal levels after 1950.

If it worked for the Brits, it ought to be fine for us too, right? No, and for a similar reason as before. In 1950, the British economy had been bombed almost to oblivion. By definition, the debt-GDP ratio was incredibly high because GDP was incredibly low. With the war over, GDP had nowhere to go but straight up. It was the absolute perfect moment to have high debt.

The United States is in almost the opposite situation. Our debt is now approach 60 percent of GDP and it could approach 80 percent by 2020. But again, that would be after 10 years of steady growth.

To cement his case, Krugman also argued on Friday that the Treasury’s cost of borrowing is incredibly cheap. Real interest rates on 10-year bonds, after adjusting for inflation, are only about 1.5 percent. What’s so scary about that?

The trouble, of course, is that interest rates are heading up. If everything goes perfectly and the economy recovers without a surge of inflation, the betting is that nominal 10-year rates will top 5 percent in a year or so -- 3 percent, if you stick with “real’’ rates and discount for inflation.

The outlook gets a lot uglier if things don’t go so swell. If foreign investors get nervous, or inflation expectations come unhinged, or the rating agencies knock down the U.S.’s AAA rating, it’s anybody’s guess what kind of a risk premium gets attached to US borrowing.

Krugman admits this. “If bond investors start to lose confidence…. they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.”

That’s what worries a lot of smart people who aren’t Republican charlatans but are worried about deficits. They don't want to slash this year's deficit or next year's. They want to see a credible gameplan over the next five to ten years for regaining control over what the CBO flatly describes as the current “unsustainable’’ trend.

I have to believe Krugman thinks the same thing. But because he’s so worried about Macchiavellian fear-mongering by Republicans, he ends up sounding less than honest himself.

David Malpass, U.S. Senator?

Bruce Bartlett — Mon, 08 Mar 2010 02:52:30 +0000

I just received the following e-mail from David Malpass, former chief economist at Bear Stearns. I've know him for at least 25 years; we worked together at the U.S. Treasury Department. I wish him the best of luck.

Dear Friends and Colleagues,

As many of you know, I believe strongly in our country’s future, but have been dismayed at the decisions Washington has been making and their impact on New York state. The problems go across the board – astronomical debt, out-of-control spending and taxes, federal decisions that undermine our security, health care legislation that would appall the drafters of the Constitution, and more.

As a result, I’ve been exploring a run for the U.S. Senate seat held by Sen. Gillibrand and wanted to give you an update. I'm thrilled to say that we are making great progress on several fronts: I'm assembling a top-notch team, we're reaching out to party members and county chairmen around the state, and we're taking the legal steps necessary to launch this huge effort in coming days.

In the past month, my motivation to run has intensified—not only because of the great reception I've been getting from family, friends, longtime colleagues and new supporters around New York, but also because I believe the Obama administration has defiantly and wrongly continued to move our country down a perilous path for New York and the nation.

I’ll be writing you more in coming days about the issues and the campaign. It’s going to be a hectic eight months, and I will deeply value your views and encouragement throughout.

Best regards,

David Malpass

The Definitive Word On Reconciliation

Stan Collender — Sun, 07 Mar 2010 15:48:55 +0000

This almost full-page chart (click on the multimedia box) from today's New York Times (way too big to reproduce here) by Congress experts Norm Ornstein, Tom Mann, and Raffaela Wakeman answers virtually every question there is to ask about the past uses of reconciliation.

The chart shows that, as I posted on February 28, reconciliation has been used when Democrats and Republicans were in the majority; to increase and decrease the deficit; to increase and decrease spending and revenues; and to create, expand, and decrease programs.

In other words, as far as reconciliation and health care is concerned, move along; there's nothing see here.

What is the National Debt?

Bruce Bartlett — Sun, 07 Mar 2010 14:58:41 +0000

My Forbes column this week tries to answer the question. BB

It's a rare public opinion poll these days that doesn't show the national debt near the top of Americans' concerns. Huge budget deficits as far as the eye can see are a source of great worry, encouraging many people to join the so-called tea party movement to demand fiscal responsibility. President Obama has responded by asking for a freeze on nondefense discretionary spending, and appointing a commission to study the deficit and make recommendations for reducing it.

Before we can take meaningful steps to control the debt--or even understand its true cost and effect on the economy--we first have to understand what it is. At its most basic level, the national debt simply consists of all the federal deficits in history minus budget surpluses. For fiscal year 2009, which ended last Sept. 30, this amount came to $7.5 trillion.

Obviously this is an astronomical sum. But it really tells us almost nothing unless we look at it in context. Economists generally look at the debt in relation to the nation's total output of goods and services, which is the gross domestic product. The debt came to 53% of GDP last year, up from 40% the year before and 35% in 2000, but down from 109% at the end of World War II.

Another way of looking at the national debt is as a share of total credit market debt, which includes home mortgages, corporate debt, credit card debt and so on. In 2009 the national debt equaled 22% of total credit market debt. This was up from the 17% to 18% level that prevailed throughout the 2000s, but is actually down from the level that prevailed during most of the postwar era. In 1950 the national debt was more than half of all credit market debt, in 1960 it was about one-third and it was more than one-fourth in 1995.

Throughout most of the postwar era the national debt fell steadily as a share of GDP. This was partly because the economy grew faster than the debt, but also because inflation eroded the value of the debt. The $250 billion debt that existed at the end of the war would have been $2.3 trillion if calculated in today's dollars. By the mid-1970s, the real (inflation-adjusted) debt had fallen by 40% even though the nominal debt rose more than 60%.

Another important issue is the gross debt vs. the debt held by the public. This confusing distinction exists because for some years the federal government has taken in more in Social Security payroll taxes than needed to pay immediate benefits. By law this surplus is invested in special Treasury securities that are part of the debt subject to the debt limit that Congress must raise from time to time.

At the end of 2009 the gross debt was $11.9 trillion, $4.3 trillion more than the debt held by the public. Although many people get excited about this figure, it is in fact economically meaningless. The Treasury securities held in government accounts really amount to nothing more than budget authority permitting the Treasury to in effect use general revenues to pay Social Security benefits once current Social Security tax revenues are insufficient to pay current benefits, something that will happen in the year 2015, according to Social Security's actuaries.

Another confusion is that the Federal Reserve is treated as part of the "public" when debt held by the public is calculated. This is awkward because the Fed is part of the government and holds vast quantities of Treasury securities, with which it conducts monetary policy. (When the Fed buys them it increases the money supply; when it sells them it reduces the money supply.) At the end of fiscal year 2009, the Fed owned about $900 billion in Treasury securities. (The Treasury pays interest to the Fed on these holdings, but the Fed then gives almost all of it back to the Treasury.)

As big as these numbers are, they really only touch the surface of the federal government's indebtedness. The full scope of that appears annually in something called the Financial Report of the United States Government. The latest report was issued Feb. 26. According to it, in addition to the national debt, the federal government owes $5.3 trillion to veterans and federal employees. But the really big debts are those owed by Social Security and Medicare: Over the next 75 years, the federal government has promised benefits for these two programs in excess of anticipated payroll tax revenues equal to $7.7 trillion and $38 trillion, respectively.

The Treasury Department estimates Social Security's deficit at 1% of GDP over the next 75 years and Medicare's deficit at 4.8%. With federal revenues estimated to be about 19% of GDP in the long run under current law, taxes would have to rise by about one-third to pay all the promises that have been made for just these two programs.

The Office of Management and Budget estimates that in the absence of massive cuts in Social Security, Medicare and other programs, or an equally massive tax increase, the national debt will rise to 77% of GDP in 2020, 100% of GDP in 2030 and more than twice GDP by 2050.

Economists are divided on the point at which the federal debt becomes a meaningful burden on the economy. A recent paper by economists Carmen Reinhart and Kenneth Rogoff suggests that historically growth has not suffered significantly until debts reached 90% of a nation's GDP.

Some Pollyannas, like my friend Larry Kudlow, think we can just grow our way out of the debt by cutting taxes. But this is not really possible given the magnitude of our problem. First, increasing real growth doesn't have as much effect on the debt as one might imagine. According to OMB, raising the rate of productivity, the basic component of real GDP growth, by 0.5% per year over the next 75 years only reduces the long-run fiscal gap by 17%.

Moreover, raising productivity even that much would be hard; over the last five years the productivity growth rate has averaged 1.8% per year, so we would have to raise it by one-fourth just to reduce the projected debt by 17%. And we can't very well expect investment to raise productivity very much when the federal budget deficit will be absorbing a huge percentage of national saving, crowding private borrowers out of the market, which will reduce business investment. Lastly, it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.

When people talk about growth reducing the burden of debt they are sometimes implying that inflation will solve the problem. If nominal GDP grows faster it doesn't matter whether it's due to faster real growth or higher inflation, many economists think. The problem with that belief is that it assumes that the debt is largely composed of long-term bonds with fixed interest rates.

Unfortunately the portion of the national debt held in the form of long-term securities has fallen over time, and the percentage in short-term securities has grown. As of Sept. 30, 2009, three-fourths of the privately held public debt matures in less than five years. This debt can't be inflated away because investors will demand higher interest rates to compensate for inflation when it rolls over, which will raise federal spending on interest payments. Also a growing portion of the debt is now indexed to inflation. Known as Treasury inflation-protected securities, more than $500 billion have been issued. Insofar as the additional spending for interest is borrowed, the real value of the debt won't fall very much.

Even in the absence of higher interest rates, growth in the debt will sharply raise the government's interest payments from 1.3% of GDP this year to 3.5% in 2020, 4.5% in 2030 and 10% in 2050. At that point half of all federal taxes will be going just to pay interest on the debt, which by law stands first in line before all other claims.

Another problem is that almost half of the debt held by the public is now owed to foreigners, up from 31% in 2000 and a historical level of less than 20%. Foreign investors will be concerned not just about inflation, but the exchange value of the dollar because all of our debt is denominated in dollars. If they fear that the dollar will drop against their currency they may demand an even higher interest rate as compensation, or insist that the Treasury issue bonds denominated in foreign currencies, which will shift all the foreign exchange risk to the taxpayer.

Recently some foolish bloggers have suggested that it would be better to default on the debt than raise taxes. That would, of course, cause tremendous hardship for millions of Americans because some $800 billion in Treasury securities are owned by private investors, almost $700 billion are owned by mutual funds, more than $500 billion are owned by state and local governments and more than $300 billion are owned by pension funds, among others. I tend to think that they won't take too kindly to the idea that raising taxes would be worse than paying them the money they are owed. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.

The Essence of Teaching, and Training Better Teachers

Andrew Samwick — Sun, 07 Mar 2010 12:54:46 +0000

Elizabeth Green has a must-read feature in this weeks' New York Times, "Building a Better Teacher." There are several worthwhile parts focusing on effective techniques, but I particularly enjoyed the discussion of what makes teaching different from learning:

Mathematicians need to understand a problem only for themselves; math teachers need both to know the math and to know how 30 different minds might understand (or misunderstand) it. Then they need to take each mind from not getting it to mastery. And they need to do this in 45 minutes or less. This was neither pure content knowledge nor what educators call pedagogical knowledge, a set of facts independent of subject matter, like Lemov’s techniques. It was a different animal altogether. Ball named it Mathematical Knowledge for Teaching, or M.K.T. She theorized that it included everything from the “common” math understood by most adults to math that only teachers need to know, like which visual tools to use to represent fractions (sticks? blocks? a picture of a pizza?) or a sense of the everyday errors students tend to make when they start learning about negative numbers. At the heart of M.K.T., she thought, was an ability to step outside of your own head. “Teaching depends on what other people think,” Ball told me, “not what you think.”

Read the whole thing.

Are Republicans Driving Me Mad?

Bruce Bartlett — Sat, 06 Mar 2010 23:12:29 +0000

Daniel Gross thinks so. BB

Fiscal Follies

March 04, 2010

By Daniel Gross

Some people have ideas about how to change things in Washington. And some people like to give the appearance of having ideas about how to change things in Washington. For example, Reps. Mike Pence and Jeb Hensarling in Wednesday's Wall Street Journal laid out a plan for recapturing the political and moral high ground on spending and, by the way, saving the nation from impending fiscal collapse. Don't raise taxes. Simply enact a Constitutional amendment. "This amendment would limit spending to one-fifth of the economy (our historical spending average since World War II). The limit could only be waived by a declaration of war or by a two-thirds congressional vote." If spending were to come in at a level of 21 percent of GDP in a particular fiscal year, the Constitution would require Congress to reduce spending by 1 percent of GDP—about $150 billion or so based on 2009's figure.

It sounds like a great idea. But Bruce Bartlett, the former Reagan Treasury official who was driven to something resembling madness by his ex-party mates' fiscal lunacy, fillets the proposal on his blog. The gross-domestic-product figures are continually being revised, and fluctuate from quarter to quarter. So, at any given moment, it would be difficult to get a precise measurement of what 20 percent of GDP is. And if there's a year in which the economy unexpectedly shrinks by a few percentage points (as happened in 2009) Congress would be required to go back and hack at spending it had already approved—in the midst of a recession.

But here's what really make this a howler. Such an amendment would have real-world consequences. Congress would have to figure out which programs to cut, and which to preserve. And yet the congressmen who are proposing this amendment won't give any suggestions as to which programs and spending they'd actually cut. Consider: in 2009, when, Pence and Hensarling write, government spending was 24.4 percent of GDP, GDP came to about $14.3 trillion (see table 3 in this release). To get under the 20 percent limit, Congress would thus have been required to cut $629 billion in spending. That's a lot. Especially when you consider that most federal government spending is mandatory spending—i.e., Social Security, Medicare, Medicaid, food stamps, etc. In fiscal 2010, discretionary spending on areas other than defense amounts to $553 billion. Cutting $629 billion in spending last year would have required zeroing out every single last dime of nondefense discretionary spending and then cutting tens of billions of dollars from defense or entitlements.

I e-mailed Mary Vought, press secretary of the House Republican Conference, to see if Reps. Pence and Hensarling had any specific ideas of what to cut. The answer: not really. "That's not what the Spending Limit Amendment is about," she e-mailed back. The congressmen do have ideas to reform spending, but the real issue is to focus on the process. "Talking about savings in the budget before we have even decided how much the savings need to be is putting the cart before the horse."

Fair enough. But like all the fake deficit hawks out there, Pence and Hensarling are willing to shout loudly about the need to change spending habits but go mute when asked for specifics. It's very difficult to take a proposal like this seriously unless its sponsors are willing to tell us how it would work in practice. An across-the-board spending cut? Across-the-board cuts in everything except debt service, defense, and entitlements? It's kind of like a person who consumes 3,000 calories a day saying he's committed to reducing his daily caloric intake to 1,800 calories—but then refusing to list any of the foods from his current diet that he'd eliminate in order to do so.

http://blog.newsweek.com/blogs/thegaggle/archive/2010/03/04/fiscal-follies.aspx

Addendum

They appear to be driving Matt Yglesias mad as well (here).

Does David Brooks Read Capital Gains And Games?

Stan Collender — Sat, 06 Mar 2010 12:19:59 +0000

I have to ask.

David Brooks wrote this in the Times on Thursday comparing today's radicals in the Republican Party with the hippies from the 1960s.

Two days earlier, we published this in CG&G comparing today's congressional Republicans with...wait for it...the hippies from the 1960s.

Coincidence?

Dysfunction in Washington Is a Pre-existing Condition

Andrew Samwick — Fri, 05 Mar 2010 19:35:31 +0000

Freshman Senator Michael Bennet of Colorado takes his new institution to the woodshed:

He doesn't go far enough, but at least he's headed in the right direction. Read more in this dialogue with Ezra Klein.

Changes Coming To Capital Gains And Games

Stan Collender — Fri, 05 Mar 2010 11:22:52 +0000

March 24th will be CG&G's second anniversary.

Since Andrew, Pete, Troy, and I joined forces two years ago, the country has gone through a financial meltdown and a recession, the first African American was elected president of the United States, the budget debate has become (to put it mildly) extremely bitter, the New York Yankees won the World Series (Sorry Andrew, I had to include that), and the blogosphere has gone mainstream. CG&G has been noticed, noted, cited, and criticized, sometimes all at the same time by the same person.

There have been two big additions to the team-- Bruce Bartlett and Ed Andrews -- and both have had an immediate impact on everything from the public discourse to CG&G's numbers.

The one thing we haven't done is change CG&G's look. That's what's coming.

Troy is working on a new design that will be cleaner, more modern, and make it possible for us to accommodate the additional advertising requests we're getting. It will also make it possible for us to do more with audio and video.

The changes will also allow us to address some of the formatting and other issues readers have brought to our attention (Thanks. Please keep those cards and letters coming in).

The design changes aren't yet final and probably won't be implemented until the end of the month. But in the meantime, as far as design and features are concerned, what else would you like to see?